The soaring prices put Brazil in third place in the Latin American inflation ranking, second only to Argentina and Haiti, countries facing, respectively, a harsh and persistent economic crisis and a political and social upheaval, marked by natural disasters.
In the 12-month period up to July, inflation in Brazil reached 9%, while Argentina’s reached 51.8% and Haiti’s 17.9%. The data are part of a survey carried out by the Brazilian Institute of Economics (Ibre) of the Getulio Vargas Foundation.
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The study does not take into account the performance of the Venezuela. The country is experiencing an economic collapse and has distorted indicators that make comparisons with other economies unfeasible.
Inflation Ranking — Photo: G1 Economy
“We had a greater exchange rate devaluation (than other countries) because of the uncertain environment at a time of low interest rates”, says André Braz, a researcher at the Ibre/FGV.
“With uncertainty growing and interest rates at 2% – at the beginning of the year – no one wanted to stay here. Investors went to safer markets and this helped to devalue our currency,” he adds.
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The survey data make it clear that the Brazilian inflationary picture has worsened more than in other countries. At the end of last year, Brazil occupied the sixth position among the region’s economies with the highest inflation.
High prices in the region — Photo: Economy G1
Once the most critical phase of the pandemic was over, inflation became a problem around the world. Higher commodity prices have added to the disarray in production chains – the health crisis has paralyzed or reduced production in many industrial sectors. And this interruption caused a shortage of products, putting pressure on production costs.
“There was an expectation – not only in Brazil, but worldwide – that these chains would return this year, but this is not happening,” says Solange Srour, chief economist at Credit Suisse bank. “It has the impact of the new variant (Delta), but there is also a difficulty in quickly resuming production in several countries at the same time.”
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The central point is that the pace of inflation in Brazil has surprised and worried analysts. Today, their analysis is that the price hike spread across much of the economy.
In the Focus report, analysts consulted by the Central Bank have weekly worsened forecasts for the Extended National Consumer Price Index (IPCA). They project that inflation will end this year at 7.58%, well above the center of the target set by the government, of 3.75%.
Why in Brazil is it worse?
Since last year, Brazilian inflation has been pressured by high food prices, as a result of the appreciation of commodities.
The increase in basic items – such as soybeans and corn – on the international market and the loss of the value of the real caused an increase in exports, which led to a shortage of supplies in the local market and, consequently, to an increase in prices.
“In 2020, we lived in a perfect storm. There was a crop failure and there was also an increase in exports due to the devaluation of the real, which made our country competitive internationally,” says Braz, from FGV. “The downside is that exports deplete the domestic market, and prices rise.”
In the analysts’ scenario, the expectation was that the real would appreciate throughout 2021 and, therefore, inflation could decline – in this year’s first Focus report, economists worked with a 3.35% forecast for the IPCA.
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But fiscal uncertainties and, recently, the institutional crisis provoked by President Jair Bolsonaro prevented a fall in the value of the dollar. The combination of these scenarios causes a flight of capital from Brazil, affecting the real.
“Since the end of last year, uncertainty has been related to how we are going to get out of the pandemic, whether we are going to keep fiscal rules. This has a great impact on the exchange rate,” stated Solange.
In the fiscal area, for example, the government has not yet indicated how the billion-dollar expenditure on court orders and the new social program, Auxílio Brasil, an expanded version of Bolsa Família, will fit into the spending ceiling.
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The inflationary picture got even worse because Brazil started to face an increase in fuel prices and a severe water crisis, which the federal government has been dealing with lately and timidly, according to specialists.
There are already several increases followed in the electricity bill of Brazilians. Last week, the National Electric Energy Agency (Aneel) created the water scarcity tariff flag and further readjusted the value of energy.
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In September, the new rise in electricity bills should be almost 7%.
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“Inflation is widespread. It’s not just more food inflation. It’s regulated price inflation, there’s gasoline, electricity. It’s also industrialized price inflation, clothing, durable goods. And now services,” says Solange .
Credit Suisse projects that the IPCA should end this year at 7.7%.
And what to expect for the future?
With price hikes spread throughout practically the entire economy, Brazil is also beginning to face a resumption of inflationary inertia.
The rise in prices in 2021 should guide contract readjustments – such as schools and health plans, for example – for next year. All of this, therefore, should impact prices in 2022.
“In September, inflation will hit 9.6% in 12 months. This number is one of the factors that will guide wage increases in the second half of the year and various prices in the economy, such as rental contracts and schools,” says Solange.
For 2022, the bank expects an increase of 5% in the IPCA, also above the center of the government’s target, which is 3.5%.
But the predictions for next year may get even worse. That’s because economists still can’t calculate the full effect of the new increase in the electricity bill. According to Aneel, the new tariff flag should be in force until April of next year.
“The indirect part (of the increase in the cost of energy) we cannot anticipate. What will the increase in energy cause in terms of the increase in other products and services that we consume? It is a part that we have to pay to see” , says Braz.
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Thus, even with a strong rise in the basic interest rate, the BC should have difficulty in containing the rise in prices. This is because, with the increase in the price of material goods, fuels and electricity, the country is facing inflationary pressure via cost, not demand.
In practice, when the BC raises interest rates, it wants to cool down the economy, slowing down household consumption, in order to contain the rise in prices. Now, the story looks different.
“This inflationary pressure will be more difficult to contain. When the BC raises interest rates, it sends the following message to families: save money now because the return on investment will increase with the rise in interest rates. So, if you postpone the consumption, its premium will be greater profitability,” says Braz.
“With this, the expectation is to take the money out of circulation, to reduce the monetary base, in order to have lower inflation”, he adds.
The evolution of the Selic rate
Since 2017, in % per year
Source: Central Bank
Today, the base interest rate is at 5.25%. In the Focus report, economists estimate that it should rise to 7.75% by the end of next year.